Tuesday, October 18, 2011 Attorneys in Real Estate Transactions
It may be tacky to push this subject, but a recent article in the New York Times discusses the importance of having an attorney in all real estate transactions. The article mainly discusses New York closings, but the concepts apply to Connecticut as well. In addition, in one of my earlier posts I noted a study which concluded that having attorneys involved in all real estate transactions in Connecticut does not increase the cost of closings.
Thursday, September 08, 2011 Title Issues in Foreclosures
Another case involving purchase of property through a foreclosure sale highlights the importance both of conducting a thorough title search and purchasing title insurance. In Water Pollution Control Authority of the City of Bridgeport v. Johnson, AC 32621, the WPCA foreclosed its lien for unpaid sewer fees, and the buyer purchased the property at auction for the price of $99,100.
After the sale was completed it was discovered that there was another mortgage on the property. The holder of the mortgage was not notified of the foreclosure and not named in the foreclosure pleadings. As a result, the mortgage was not extinguished in the foreclosure and remained a valid lien on the property. That lender proceeded to file a new foreclosure, which threatened to take away the buyer’s entire investment in the property.
The buyer requested that the court vacate the judgment of foreclosure, invalidate the sale and return its funds. The Superior Court denied the request and the Court of Appeals affirmed. The appellate court ruled that Section 49-30 of the Connecticut General Statutes clearly provided that, notwithstanding the omitted mortgage, the foreclosure was valid and the omitted lender was free to pursue its own foreclosure. The court stated that the buyer knew that it would be assuming all risks with regard to the condition of the property, including the condition of title to the property. In reaching this conclusion the court noted that the seller had provided very clear disclosures.
I find the case somewhat troubling, because the buyer paid value for the property and received a deed which stated that the property was being conveyed “free and clear … of all claims subsequent in right” to the foreclosed lien. There were, however, other circumstances involved. The court noted that the buyer waited fifteen months to file its motion to vacate the foreclosure judgment.
Regardless of the facts, this case provides an important lesson. There are often, very often, mistakes in foreclosure actions. There are firms which have thousands of foreclosure actions pending at any one time, and they often miss important details. I personally have represented purchasers of two properties where there were omitted liens. Both were resolved, but only after a delay of over a month. It is critical that the buyer conduct a full title search, and obtain title insurance. In this case, a title insurance policy would have cost the buyer $400. If the buyer had obtained title insurance, the title insurance company would have had to assume the risk of the additional lien. This would include the cost of legal fees to defend against the claim. Title insurance it not a substitute for due diligence. But it is a layer of protection that you dismiss at your own risk. Tuesday, May 31, 2011 SBA 504 Loans
I just completed the closing on a purchase of an industrial property in Waterbury. My client, a manufacturing company, was tired of paying rent for a bad building and wanted to purchase its own facility. The combination of low interest rates and a depressed real estate market made for a perfect opportunity. In order to finance the purchase, my client (with my urging) chose to go with a 504 loan from the U.S. Small Business Administration (SBA). I have worked on many of these transactions and it is an excellent form of financing. The SBA 504 loan is specifically designed for the purchase of owner-occupied properties. It cannot be used for investment properties. The purchaser must occupy more than half of the property, and the balance of the property can be leased out to another tenant.
The 504 program is attractive because the borrower can finance up to 90% of the purchase price. Most projects are funded on a 50/40/10 basis: a bank funds 50%, the SBA funds 40% and the borrower must contribute a minimum of 10% of the project cost. The SBA portion is funded at a fixed rate for 20 years, a deal which is not available from traditional banks. The bank portion is negotiable but since the loan is secured by real estate, most banks will give a 10 year fixed rate.
One thing different about the SBA loan is that it does require working with two different lenders. The borrower must make applications both to a bank and to a lender authorized to handle SBA loans. In this case we used the Connecticut Community Investment Corporation, an excellent organization located in Hamden. That means submitting all materials to two different organizations, and obtaining approvals from both as well. As a result, the loan approval process is a little more time intensive for the borrower, but as long as you work with an experienced SBA lender it isn’t a tremendous burden. The approval also takes a little longer, because once the bank issues its commitment and sends it to the SBA, the SBA then needs to approve. That typically requires another week.
Another benefit of an SBA loan is that the borrower can include additional costs, such as renovation costs, moving costs or even equipment purchases in the loan amount. Most banks are reluctant to do this without the SBA involvement. In my deal the loan amount exceeded the purchase price of the property by almost $200,000. The SBA does not administer construction loans, so in this situation the bank funds all the loan proceeds up front, and then when the construction is completed the SBA funds its portion. This requires a second closing and some additional costs, but again the benefits of the 504 loan generally outweigh the costs.
The SBA approval process generally handles environmental issues very well. The SBA will even close in a situation where remediation is required, as long as there is a sufficient escrow in place to cover the estimated costs. If a site is subject to the Transfer Act or has any other environmental issues, it is important to have a discussion with the SBA lender (preferably in person so there is no confusion) to determine what the SBA requirements will be.
One concern is that SBA loans require more paperwork or take longer to get approved and close. It is true that the borrower will be required to submit financial statements and other materials to two different lenders, but generally the borrower would just be submitting a second set of copies of the same documents. And as mentioned above, the additional time period for SBA approval is typically only one week. Friday, February 25, 2011 New SBA Loan Program for Maturing Mortgages
Small businesses maturing commercial mortgages or balloon payments before Dec. 31, 2012, may be able to refinance their mortgage debt with a Small Business Administration (SBA) loan through a new program that begins Monday, February 28. The program, authorized under the Small Business Jobs Act, will be in effect through Sept. 27, 2012.
The new loan program is structured similarly to a traditional SBA 504 loan, which is offered to businesses that want to expand. Borrowers will be able to refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs. No expansion of the business is required.
I could not find any information about the new loan on the SBA website, perhaps because the program does not start until February 28th. But any business which is interested in this new loan program should contract Carolyn Welch at the Connecticut Community Investment Corporation, (203) 776-6172 Ext. 132 or cwelch@ctcic.org. CTCIC, located in Hamden, is one of the organizations in Connecticut which administers SBA loans. I have worked with Carolyn on several transactions and my clients have been very pleased with her work. Monday, August 16, 2010 Connecticut Ranked as One of the Least Expensive States for a Closing
Connecticut is close to being in the top-10 least expensive states in which to close on a home, according to a new survey. The survey ranked Connecticut 39 nationwide in total closing costs. This is an improvement from the state's ranking as 24th most expensive in 2009, according to Bankrate.com. This year, those closing on a home in Connecticut can expect to pay $3,391.
This new survey contradicts the common belief that closing on a home is expensive in Connecticut because of the requirement that an attorney be involved to conduct the closing and to issue title insurance. Title companies do not conduct closings in Connecticut, which is common in some other states, such as Florida.
The most expensive states to close on a home were New York, Texas and Utah, Bankrate.com said. The total costs for New York were $5,623. Thursday, July 15, 2010 Residential Property Condition Disclosure Reports
A recent case in the Connecticut Appellate Court highlights the importance of proper disclosure when completing a Residential Property Condition Disclosure Report. In that case the owner of a house had covered up a substantial crack in the foundation and floor slab when he refinished the basement. When the owner later sold the house, he stated “unknown” in response to a question about foundation problems. Before purchasing the house the buyers completed a home inspection, but there was no way anyone could have discovered the crack. After a heavy rain flooded the basement the buyers subsequently discovered the crack and sued the seller.
The contract contained the following language, which is standard in many residential real estate contracts: “The BUYER agrees that he has inspected the Premises, is satisfied with the physical condition thereof and agrees to accept at closing the Premises in the present condition on an ‘as is’ basis . . . . Neither SELLER nor SELLER’s agents have made any representations or warranties as to said Premises on which Buyer has relied other than as expressly set forth in this Agreement.” The seller argued that this language was controlling and absolved the seller from any liability for any misrepresentation about the condition of the property.
The court rejected that argument, stating that such language did not protect the seller when the misrepresentation was negligent and not innocent. In this case, the court stated, the seller had full knowledge of the crack in the foundation and did not disclose it to the buyers. In addition, the court placed substantial emphasis on the buyers’ inability to discover the crack through their home inspections. The court stated that “[t]he defendant’s mis-statement served to conceal his actual knowledge of a defect in the condition of the property that he sold to the plaintiff.”
This case, decided by the Appellate Court, is a clear statement of the importance of being very careful when completing these disclosure reports. They should not be rushed. If a seller fails to disclose the existence of any defect of which he or she has actual knowledge, the seller could be held responsible for any damages incurred by the buyer. Thursday, July 01, 2010 Congress Extends Tax Credit
The U.S. Congress on Wednesday approved a bill extending the closing deadline for homebuyers trying to take advantage of a popular tax credit.
Homebuyers with contracts signed by April 30 who failed to go to closing by the June 30 deadline will now have until September 30 to complete their purchases. The House of Representatives on Tuesday approved the bill and it now goes to President Barack Obama for his signature.
The $8,000 tax credit for first time homebuyers and $6,500 credit for others purchasing a new primary residence was a highly popular temporary measure by the Obama administration to jump start home sales during the economic recession.
In order to qualify for the credit a homebuyer must still have signed a binding contract by April 30, 2010. But now the closing deadline has been extended until September 30th. This will assist those persons who have not been able to close because of financing or other issues. Friday, January 29, 2010 Broker's Liens
Connecticut statutes provide two procedures for real estate brokers to protect their ability to collect commissions due in connection with sales and leases of real estate. These procedures can be used when a broker is concerned that he or she will not able to collect a commission (i.e., concerned about getting “stiffed”).
Section 20-325a of the Connecticut General Statutes grants to brokers the power to record a lien to protect their rights to a commission. This section applies to both sales and leases. The statute provides that a broker “who has performed acts or rendered services relating to real property … shall have a lien upon such real property” for the amount of the compensation due. The lien does not attach, or become enforceable, until all contingencies to the transaction have been satisfied. At that point the broker must record the claim for lien in the land records where the property is located. If the contract is with the buyer, then the lien can only be recorded after the sale occurs. The broker must also serve a copy of the lien on the owner property and comply with other notice requirements as described in the statute.
There are many other strict requirements a broker must follow in order to use this procedure. The broker must be properly licensed; there must be a written agreement meeting the requirements of the statute; the agreement must provide notice that the broker has these lien rights; and other requirements. Any broker who intends to file a lien must follow the requirements of the statute carefully.
As long as attention is paid to the necessary details, this statute does provide some options for a broker who feels he or she is not going to get paid. It must be employed prudently, because the last thing anyone wants to do is kill the deal.
There is another, lesser known statute which provides protection for brokers in commercial lease transactions. Connecticut General Statutes section 20-325k provides that a commission agreement that provides for future payments, such as the in the case of a lease renewal, will be binding on subsequent owners of the property, including someone who acquires the property through foreclosure, if the broker records a notice of commission rights and complies with the requirements of the statute. If the lease renews after the property is transferred, then the new owner will be obligated to pay any commission that is due on the renewal. Again, the statute should be reviewed carefully to ensure compliance with the various requirements.
The statute is very clear that the recorded notice does not constitute a lien on the property. As a result, the broker cannot bring a foreclosure action to collect on the lien. This was probably inserted in the statute to provide some comfort to lenders who did not want another lien on the property. But if the statute creates a contractual obligation that did not previously exist, I don’t see how there is much of a difference. Either way the property owner has a new obligation.
Clearly the intent of the statute was to provide some protection to real estate brokers without creating a new way of creating a cloud on title. But I don’t think the statute accomplishes that goal. The existence of such a notice is certainly going to come up as an issue in any closing. The buyer and seller can likely resolve it through a negotiated solution. The buyer may be willing to assume the commission obligation as a cost of doing business. But no lender is going to finance an acquisition with that notice in place, and the lender will insist that it be removed. The broker will then insist that it re-recorded after the closing. But the lender may object to that as well. What if there is a foreclosure? Can the notice be foreclosed out? How can it be foreclosed out if it is not a lien?
There is no easy solution to this issue. The only answer is that counsel for the buyer, seller and lender will have to think and talk it through and come up with a compromise. Tuesday, December 01, 2009 Increase in Filing Fees at the Connecticut Secretary of StateEffective October 1, 2009 there has been a significant increase in filing fees at the Connecticut Secretary of State for business and UCC filings. For example, the fee for filing a UCC-1 Financing Statement is now $50 (previously $25), and the fee for filing Articles of Organization for a limited liability company is now $120 (previously $60). The fee increase has not been very well publicized. Tuesday, September 22, 2009 New Laws Affecting Real Estate in Connecticut--Part 1The Connecticut General Assembly was preoccupied with addressing the severe budgetary crisis affecting the state as a result of the current recession. Nonetheless, our representatives managed to get some other work done. This is a first in a series of postings which explain legislative changes to Connecticut real estate laws.
Copies of the complete public acts can be found at the State web site at www.cga.ct.gov. Just click on “Quick Search,” select “Public Act” and enter the public act number set forth below.
Public Act 09-127 (HB 6114). An Act Concerning Disclosure of a Historic District Designation and Leased Items to Prospective Purchasers of Residential Property.
This Act amended Section 20-327b of the general statutes (relating to Residential Condition Reports). It requires disclosure of a leased item (including, but not limited to, propane fuel tanks, water heaters, major appliances and alarm systems) to prospective purchasers of a residential property. It also requires disclosure if the real property is located in a municipally-designated village or historic district, or has been designated on the National Register of Historic Places. The Act requires a statement that information concerning those districts may be obtained from the municipality’s village or historic district commission (if applicable).
Signed by the Governor on June 18, 2009; effective from passage. Tuesday, March 03, 2009 Requirements for Security Deposits for Residential LeasesThe current economic downturn we are all suffering through has brought an increased focus on renting property. Many individuals and families, unable to afford their mortgage or rent, have downsized to save money. Other people looking for investment opportunities have begun buying rental properties. In all of these situations it is critical people know both their rights and obligations with respect to security deposits. Connecticut has some very specific requirements which are not complicated but which can create an unwelcome trap for anyone who does not follow the rules. Note that these requirements only apply to residential property, including single-family homes. They do not apply to commercial property.
Amount: For tenants under the age of 62, the maximum security deposit which can be required is two months’ rent, plus the current month’s rent. For tenants age 62 and older, only one month’s rent is allowed for a security deposit, plus the current month’s rent.
Bank Account: All security accounts must be deposited in a bank account at a financial institution located in Connecticut. That means the account must be set up at a branch here in the state. The account must be used solely for security deposits and cannot be commingled with the landlords own funds. But security deposits from different properties can be commingled in one account. There does not need to be a separate account for each property, although this is a good idea for large properties. Of course, the landlord should keep accurate records of all accounts and security deposits.
Interest. Landlords must pay interest on security deposits at the rate of 1.5% each year. The interest is required to be paid yearly on the anniversary of the start of the lease. If the account earns a lesser rate, the landlord must make up the difference. If the account actually pays more, the landlord can retain the excess.
Refund of Security Deposits. When a lease ends, there are very specific requirements for refunding security deposits. If the landlord does not follow these rules, there are substantial penalties. When a tenant leaves, the landlord should obtain a forwarding address for the tenant. If the tenant provides a forwarding address, then the landlord has thirty days from the end of the lease to return the security deposit (plus the required interest) or to provide a list of any damage to the property and the balance of the security deposit after deducting the cost to repair the damage. The list must be itemized and must list the cost to repair for each area of damage. Of course, damages can include unpaid rent. If the landlord does not have the tenant’s forwarding address, then the landlord has fifteen days following the date the landlord receives the address to return the security deposit or to provide the list of damages. So if the tenant breaks the lease and does not leave a forwarding address, the landlord would not be immediately required to return the security deposit.
If the landlord does not refund the security deposit or provide the itemized list within the statutory time period, then the landlord is automatically liable for double the amount of the security deposit. There is no defense to this liability, even if the tenant has caused substantial damage to the property. Therefore, it is critical that the landlord follow the statutory procedure. Thursday, December 04, 2008 Could a Drop in Mortgage Rates Jumpstart a Turnaround?The New York Times reported today that a drop in mortgage rates has resulted in an increase in mortgage refinancing. According to the Times, the drop in rates was the result of a decision by the Federal Reserve to buy up $500 million in mortgage-backed securities. In addition, both the Times and CNNMoney.com have reported that the Treasury Department is looking into ways to drive mortgage rates even lower. The drop in interest rates, coupled with the nationwide decline in housing prices, just might convince people to jump back into buying homes. This would include not just people looking for a new place to live, but also investors looking to gobble up good deals. With the record number of foreclosures in this country it is important that these houses get back in the hands of people who will maintain them and find occupants for them. Lower interest rates certainly are not going to solve all of the nation’s housing woes, but they could be a good first step.
As the articles noted, lower interest rates aren’t going to help people who can’t afford their current mortgages, because only the most qualified borrowers will get the new lower rate. But there are many proposals on the table to help the millions of distressed borrowers, and hopefully our government will finally find the right plan and get it moving. There is no dispute that stabilizing real estate is critical to reviving our economy.
Yahoo Finance also has a good article. Monday, November 24, 2008 Lead Paint Disclosure Requirements in Residential TransactionsA recent article in the Commercial Record reported that a number of real estate brokerages throughout New England were being investigated by the federal Environmental Protection Agency for failing to comply with lead paint disclosure requirements. I don’t know if these agencies really were not in compliance, but it presents a good opportunity to provide some background information on the disclosure requirements. I won’t go into the requirements in depth because a detailed description of the requirements can be found at the HUD website. But it is important to remember that, before any contract for 1-4 family property is fully signed, the seller and the agent must provide the following information:
- EPA approved pamphlet on lead-based paint hazards.
- Disclose any known information concerning lead paint at the property.
- Provide copies of all existing reports on lead paint at the property.
- Include an attachment to the contract which includes a lead paint warning statement.
- Allow the buyers an opportunity to inspect for lead paint hazards.
Note that these requirements also apply to leases of apartments and single-family residences. Tuesday, October 21, 2008 Update on Websites of Connecticut Cities and TownsA recent article in the Connecticut Law Tribune (October 6, 2008) reports that some small towns in Connecticut have been forced to take down their web sites because of a new Connecticut law which requires them to post notices and minutes of their commissions. These towns say they do not have the staffing required to update their sites on a daily basis, or the funds to hire a webmaster. As a result, they have shut down or disabled their sites in order to avoid complying with the new law. Eventually it is likely that the towns will find a way to provide the information and their sites will up and running again. Please refer to the entire article for more information. Tuesday, September 16, 2008 The Information Age Comes to the Real Estate Business The tenth anniversary of the founding of Google seems like a good time to reflect on how the world wide web has transformed the real estate business by making so much information available at the click of a mouse. In the old days if you needed information about a piece of property, whether it was title, zoning, or assessment, you had to travel to the town hall to obtain it (or pay someone else to go). Since everything is filed by town in Connecticut, and not by county, that meant traveling to one of the 168 towns. For example, if you wanted to research the zoning of a property, you had to go to the town hall to review the zoning map and the zoning regulations. In addition, if you needed information from a state agency, such as the Department of Environmental Protection, you had to travel to the offices of that agency, generally in Hartford.
Now a tremendous amount of information needed by real estate professionals is available on the web. The websites of Connecticut towns are no longer just for finding out the town hall hours. For example, many towns now have copies of their zoning regulations post on their websites. So if you need to research the zoning status of a property, there is no need to travel to the town hall. The same is true of real estate tax and assessment information.
Of course, not all information is available on the web. If you need something in writing, such as a receipt or a certificate of zoning compliance, then you are still going to need to make a trip to the town hall. In addition, most towns do not have electronic real estate records. Many towns now have computerized indexes to the land records, which make conducting title searches much easier. The electronic records are usually completely up to date. These indexes are not, however, available through the internet. Some towns have started putting land records on the web, but most towns have not done this.
In order to find a town’s website, simply do a search under the name of the town with Connecticut after it. The town’s website will generally come up on the first page of results.
Even more impressive are the websites of the state agencies in Connecticut. They all have a wealth of information and are very user friendly. For example, on the Department of Environmental Protection website, www.ctdep.gov, you can obtain information on topics such as the Connecticut Transfer Act or underground tanks. All of the laws and regulations enforced by the DEP are there also, as well as up to date forms. The Connecticut Secretary of State website ( www.sos.gov) was recently updated and is much easier to use than the old site. Anyone can research corporations, LLC’s and other firms, search UCC records, and obtain forms. Be careful to use correct spelling when using these sites, because if you are looking for the name of a company it may not find the records without the correct spelling.
All of this great information is not limited to Connecticut. Information from other states is also readily available. I recently represented a client who purchased a business in
Vermont. I was to find information on the corporate status of the business, UCC filings, and business taxes, all through research on the web.
The web is changing all businesses, and real estate is no different. The amount of information about real estate is tremendous and it is growing all the time. When you need information about real estate in Connecticut, or anywhere else, the web is definitely the place to start. Thursday, September 04, 2008 Attorney Fraud in Real Estate Transactions: Taking Steps to Ensure that it Stops Now.The Connecticut real estate bar has received a lot negative publicity over the last several years as a result of the actions of a few attorneys. These individuals have breached their fiduciary duties to their clients and the public trust by stealing money from their clients. In most cases this is done through residential real estate transactions, although there have been instances of theft and fraud involving estates and other legal representation. The number of instances of attorney thefts and the number of attorneys involved are both very small. This statistic is, however, not very relevant or comforting because the dollars can be very large, the financial effect on the clients is always devastating, and any number of thefts by attorneys is too many. Just one theft by an attorney can result in lost savings for a number of individuals.
As I mentioned, most attorney thefts occur in connection with real estate transactions. The attorney who decided to engage in this behavior generally accomplishes the theft by not paying off the seller’s mortgage and keeps the money for his own use. He (although almost all attorney thefts are done by men) eventually pays off the mortgage with the funds from another transaction. It is similar to a check kiting scheme.
If you have purchased a home, and you purchased an owner’s policy of title insurance, then you are protected. An owner’s policy protects you because the title insurance company will have to pay off any mortgages that were taken out before the date you purchased your home. It is a much bigger concern for the seller of a home, because the seller remains obligated for the unpaid mortgage. The fact that the seller’s attorney did not use the proceeds from the sale of the house to pay off the mortgage does not release the seller from responsibility for the mortgage. Refinances are also an area where this kind of fraud may happen because the attorney keeps the funds instead of paying off the old mortgage.
The good news, however, is that the vast majority of Connecticut attorneys are honest people and clients have nothing to be concerned about. In addition, attorneys, title insurance companies, and bar associations have all implemented new procedures to prevent this kind of fraud. First, the Statewide Grievance Committee, a part of the Connecticut Judicial Department, has implemented a new policy of random accounting of attorneys’ trust accounts. Under this policy all attorneys must submit to a comprehensive audit of their accounts or they will face disciplinary action and possible loss of their law license. The audits will reveal any improper actions by attorneys. Title insurance companies also conduct annual audits of attorneys. Second, title insurance companies doing business in Connecticut and local bar associations have adopted new requirements for attorneys to ensure that mortgages are paid off immediately as part of every closing. The new policies require that both attorneys be involved in the mortgage payoffs so that there is a system of checks and balances. No attorney will be able to hide the fact that he has not paid off his client’s mortgage.
As I mentioned before, even one instance of attorney fraud is unacceptable. As a result, attorneys in Connecticut are working hard to ensure that it is eliminated. The measures being taken will see that this happens. Friday, March 14, 2008 Beware of aggressive assessors!I recently learned from a client who purchased a home in Fairfield County that at least one area town has developed a new way to uncover homes which are not properly assessed. After the individuals purchased the house, they were sent an additional tax bill based upon an increased assessment. They spoke with the town, and were informed that the town increased the assessment because the house had a finished basement which had never been reported to the town. According to my client, the finished basement had never been reported to the town because the prior owner had completed the work himself and had never taken out a building permit. Now for the $64,000 question: how did the town discover this? The town had recently started reviewing the data on the multiple listing service (MLS) and compared it to the assessment data. The house was advertised as having a finished basement, but there was no finished basement noted on the assessor’s card. This is very sneaky but nonetheless there are some valuable lessons to be learned. First, before buying a house, it is important to research the house fully. This includes reviewing the assessor’s records and comparing them to the information on the MLS. This will help to avoid any nasty real estate tax surprises down the road. Second, unlike New York where the practice is common, in Connecticut it is not customary for an attorney, home inspector or appraiser to review the records of the building and zoning departments. It certainly, however, is a prudent idea. Such a review will help determine if there is any gap in the required permits. |